CAPITAL ADEQUACY: BASEL 2 Problem 1. State Bank has the following year-end balance sheet (in millions):AssetsLiabilities and EquityCash$10Deposits$90Loans$90Equity$10Total Assets$100Total Liabilities & Equity $100The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term orvariable-rate. Rising interest rates have caused the failure of a key industrial company, and as aresult, three percent of the loans are considered to be uncollectible and thus have no economicvalue. One-third of these uncollectible loans will be charged off. Further, the increase in interestrates has caused a 5 percent decrease in the market value of the remaining loans. What is theimpact on the balance sheet after the necessary adjustments are made according to? Ignore the taxeffect. c.What is the new market to book value ratio if State Bank has $1 million shares outstanding? Problem 2National Bank has the following balance sheet (in millions) and has no off-balance-sheet activities:AssetsLiabilities and EquityCash$20Deposits$930Treasury bills$40Subordinated term debentures$40Residential mortgages$500Convertible bonds$50Consumer loan $200 Common stockUnrated loans$330Retained earnings$30Total Assets$1,090Total Liabilities and Equity$1,090a.What is the leverage ratio? 40 b.What is the Tier I capital ratio? Estimate the Risk weighted assets for credit risk under the standardized approach. Ignore the operational and market risk estimates.
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